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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District softened in April. Manufacturers reported declines in shipments and new orders compared with March. Retail sales of general merchandise in early April were running below the rate set in the same period a year ago, and sales of automobiles and light trucks were off as well. Bank lending was edging up, with slight gains in business and residential real estate lending. Business conditions for most of the service firms contacted in the first half of April were virtually flat.

The outlook in the Third District business community is cautious. Manufacturers forecast some increases in shipments and orders during the next six months despite the current weakness, but contacts in other sectors are less optimistic. Retailers have mixed views. Some expect sales to improve soon, but others believe consumers will continue to limit spending. Auto dealers expect a lower sales rate in 2003 compared with 2002. Bankers generally expect business and consumer loan demand to rise very slowly in the next few months, but they anticipate a decrease in residential real estate lending. Employment agencies forecast very modest increases in hiring in the second quarter, mainly by financial services firms, but they anticipate little change in employment in other sectors.

Third District manufacturers reported declining orders and shipments in mid-April, in a continuation of the slackening in demand for their products that they noted in March. Most of the firms contacted for this report said the decrease in orders set in before the start of combat in Iraq, although some noted drops in orders after it had begun. Order backlogs continued to shrink in April, and local plants trimmed working hours. Although conditions in the region's manufacturing sector remained weak, some firms that produce lumber and metal products reported rising orders, mainly for goods and materials used in home construction and remodeling. Most area manufacturers indicated that prices for both the inputs they use and the goods they manufacture have been steady, although many said they are paying more for gasoline and other fuels and for petroleum-based products.

Despite the persistence of weak conditions, the region's manufacturers forecast better business ahead. Over half of the firms surveyed in April expect increases in orders and shipments during the next six months, and only one in ten anticipate decreases. Area manufacturers' capital spending plans call for increases, on balance, although half of the firms polled in April indicated their capital expenditures will be steady. Few firms were planning major expansions, and several noted that outlays for new equipment in the immediate future will be on an as-needed basis only.

Third District retailers reported lower store traffic and slower sales in late March and early April compared with the same period a year ago. The decline in sales has affected all lines of merchandise. Store executives said a combination of unseasonably cold weather, deteriorating consumer confidence about the economy, and the war in Iraq has dampened consumer spending.

Looking ahead, store executives have mixed views. Some believe the spring season will bring an upturn in sales once normal weather prevails and the conflict in Iraq subsides, but others are concerned that consumers will continue to limit spending until there are positive signs that the economy is improving. Retailers said they were fully stocked with spring merchandise, as is usual at this time of year, and they do not anticipate making extensive price reductions unless sales in the weeks ahead fall significantly below their current expectations.

Auto dealers generally indicated that sales were down in April compared with March and with April of last year. Although a few dealers saw some continuing strength in demand for new cars, most said sales have been on the decline and inventories have increased. Some dealers said that sales of large sport utility vehicles have been particularly weak since gasoline prices have risen. Although some manufacturers have stepped up incentives, dealers in the region anticipate sales for this year as a whole will fall as much as 5 percent from last year.

Outstanding loan volume at Third District banks has barely grown in recent weeks. Bankers generally reported slight gains in business loans and residential real estate lending but virtually no growth in consumer lending. Bankers noted that business firms and individuals have been very cautious about adding to their indebtedness. Bank lending officers generally reported that commercial loan quality has been steady, although some said they have become concerned about the financial conditions of some commercial real estate owners.

Investment companies indicated that cash inflow in the past few months has been running significantly below the pace during the same period a year ago. Individual investors continue to prefer bonds to equities, and they appear to be favoring savings accounts over money market funds due to the higher rates available from depository institutions.

Bankers in the Third District generally expect lending to businesses and individuals to grow very slowly in the near term, and they anticipate a decline in residential real estate lending along with lower home sales this year compared with last year. Investment companies expect continued reluctance by individual investors to increase the amount of their investments in stocks, but they believe institutional investors might step up their equity investing later this year.

Most of the service firms contacted in April reported little change in activity in recent weeks. Demand for information technology services has increased somewhat, mainly from government agencies, according to contacts in this industry, while demand from the commercial sector has been flat. Other types of business services firms generally indicated that they have had little or no growth in activity.

Employment agencies in the region reported that hiring plans among their client firms call for some increases in the second quarter but not strong gains. The best prospects for increased employment are among financial services firms, according to employment agencies, while most other sectors are expected to see little change in employment.

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Last update: April 23, 2003